Maybank Philippines, Inc. vs. Spouses Oscar and Nenita Tarrosa

The right to foreclose a real estate mortgage prescribes only from the time the mortgagor is in default, which requires prior extrajudicial or judicial demand unless the mortgage contract expressly stipulates that demand is unnecessary or that default commences upon mere failure to pay on the maturity date; a clause merely granting the mortgagee the right to foreclose upon the mortgagor's failure or refusal to pay does not dispense with the requirement of demand under Article 1169 of the Civil Code.

In December 1980, Spouses Oscar and Nenita Tarrosa obtained a loan from PNB-Republic Bank (now Maybank Philippines, Inc.), secured by a real estate mortgage over a parcel of land in San Carlos City, Negros Occidental. After fully paying this loan, they obtained a second loan in March 1983, payable on March 11, 1984, which they failed to settle upon maturity. Despite the maturity date passing, Maybank did not immediately foreclose but instead sent a final demand letter dated March 4, 1998, requiring payment within five days. When the spouses failed to pay, Maybank commenced extrajudicial foreclosure proceedings in June 1998, leading to a public auction sale in July 1998.

• The Loans and Mortgage: On December 15, 1980, respondents-spouses Oscar and Nenita Tarrosa obtained a ₱91,000.00 loan from petitioner Maybank Philippines, Inc. (then PNB-Republic Bank), secured by a Real Estate Mortgage dated January 5, 1981, over a 500-square meter property covered by TCT No. T-5649 in San Carlos City, Negros Occidental. After paying this loan, the spouses obtained a second loan of ₱60,000.00 in March 1983, payable on March 11, 1984, which they failed to settle upon maturity.
• Demand and Foreclosure: In April 1998, the spouses received a Final Demand Letter dated March 4, 1998, requiring settlement of ₱564,579.91 (principal, interests, and penalties) within five days. The spouses offered to pay a lesser amount, which Maybank refused. On June 25, 1998, Maybank commenced extrajudicial foreclosure proceedings before the Ex-Officio Provincial Sheriff. The property was sold at public auction on July 29, 1998, to Philmay Property, Inc. for ₱600,000.00, with a Certificate of Sale issued on July 30, 1998.
• The Complaint: On September 7, 1998, the spouses filed a complaint for declaration of nullity and invalidity of the foreclosure and auction sale proceedings with damages against Maybank, Philmay Property, Inc., the Sheriff, and the Registry of Deeds. They alleged that the second loan was unsecured, that Maybank unjustly refused their offers of payment after the demand letter, and that Maybank's right to foreclose had prescribed or was barred by laches.
• Defense: Maybank countered that the second loan was secured by the same mortgage under a continuing security provision, that the spouses had acknowledged their indebtedness and negotiated for restructuring but failed to pay, and that the acknowledgment of debt controverted the defense of prescription.

• Continuing Security: Maybank maintained that the second loan was secured by the same real estate mortgage pursuant to the continuing security provision therein, which covered future loans and credit accommodations.
• Accrual of Cause of Action: Maybank argued that its right to foreclose accrued only after the final demand letter was sent and the spouses failed to pay within the stipulated period, not from the loan maturity date in 1984, because the mortgage did not expressly dispense with the requirement of demand under Article 1169 of the Civil Code.
• Acknowledgment of Debt: Maybank contended that the spouses' positive acknowledgment and admission of their indebtedness, evidenced by their offers to pay and negotiations for restructuring, controverted the defense of prescription.

• Unsecured Loan: The spouses argued that the second loan was a clean or unsecured loan, not covered by the real estate mortgage executed for the first loan.
• Refusal of Payment: They maintained that after receiving the final demand letter, they attempted to pay the second loan including agreed interests and charges, but Maybank unjustly refused their offers.
• Prescription: They contended that Maybank's right to foreclose had prescribed, reckoned from March 11, 1984, when the second loan became past due, as no timely judicial action, written extrajudicial demand, or written acknowledgment of the debt had interrupted the prescriptive period.

• Prescription of Right to Foreclose: Whether the Court of Appeals committed reversible error in finding that Maybank's right to foreclose the real estate mortgage was barred by prescription.

• Prescription of Right to Foreclose: Reversible error was committed by the Court of Appeals. An action to enforce a right arising from a mortgage must be brought within ten years from the time the right of action accrues, which is when the mortgagor defaults in the payment of his obligation. Default requires: (a) the obligation be demandable and liquidated; (b) the debtor delays performance; and (c) the creditor requires performance judicially or extrajudicially, unless demand is unnecessary under the exceptions in Article 1169 of the Civil Code. Paragraph 5 of the mortgage contract, which granted Maybank the right to foreclose upon the mortgagor's failure or refusal to pay, merely articulated the mortgagee's right to elect foreclosure but did not expressly declare that demand was unnecessary or that default would commence upon mere failure to pay on the maturity date. Consequently, the right to foreclose accrued only after the lapse of the five-day period stated in the final demand letter dated March 4, 1998. The foreclosure proceedings commenced on June 25, 1998, well within the ten-year prescriptive period.

• Accrual of Right to Foreclose — An action to enforce a right arising from a mortgage must be enforced within ten (10) years from the time the right of action accrues, i.e., when the mortgagor defaults in the payment of his obligation to the mortgagee; otherwise, it will be barred by prescription.
• Requisites of Legal Delay (Default) — For a debtor to be in default: (a) the obligation must be demandable and already liquidated; (b) the debtor delays performance; and (c) the creditor requires the performance judicially or extrajudicially, unless demand is not necessary under the exceptions in Article 1169 of the Civil Code (when the obligation or law expressly so declares; when the designation of time was a controlling motive for the contract; or when demand would be useless).
• Effect of Mortgage Clauses on Demand — A contractual provision merely granting the mortgagee the right to foreclose upon the mortgagor's failure or refusal to pay does not dispense with the requirement of prior demand under Article 1169 of the Civil Code; the contract must expressly declare that demand shall not be necessary for default to exist or that default shall commence upon mere failure to pay on the maturity date.

• "An action to enforce a right arising from a mortgage should be enforced within ten (10) years from the time the right of action accrues, i.e., when the mortgagor defaults in the payment of his obligation to the mortgagee; otherwise, it will be barred by prescription and the mortgagee will lose his rights under the mortgage."
• "In order that the debtor may be in default, it is necessary that: (a) the obligation be demandable and already liquidated; (b) the debtor delays performance; and (c) the creditor requires the performance judicially or extrajudicially, unless demand is not necessary..."
• "Paragraph 5 of the real estate mortgage... merely articulated Maybank's right to elect foreclosure upon Sps. Tarrosa's failure or refusal to comply with the obligation secured... In no way did it affect the general parameters of default, particularly the need of prior demand under Article 1169 of the Civil Code, considering that it did not expressly declare: (a) that demand shall not be necessary in order that the mortgagor may be in default; or (b) that default shall commence upon mere failure to pay on the maturity date of the loan."

• Cando v. Spouses Olazo, 547 Phil. 630 (2007) — Cited as controlling precedent for the rule that an action to enforce a right arising from a mortgage must be enforced within ten years from the time the right of action accrues.
• DBP v. Licuanan, 545 Phil. 544 (2007) — Followed for the principle that the right to foreclose accrues only after demand is made and subsequently refused (unless demand is unnecessary).
• Caltex Philippines, Inc. v. Intermediate Appellate Court, 257 Phil. 753 (1989) — Cited for the enumeration of the mortgagee's remedies (foreclosure or ordinary action to collect the debt).

• Article 1169, Civil Code — Governs the commencement of delay (mora) and provides that those obliged to deliver or do something incur in delay from the time the obligee judicially or extrajudicially demands fulfillment, except in specific instances where demand is not necessary.

Maria Lourdes P.A. Sereno (Chief Justice), Teresita J. Leonardo-De Castro, Lucas P. Bersamin, Jose Portugal Perez.